Couple Lose Bid for Tax Refund Tied to Tuition Courts:

They had claimed that part of their payments to Jewish day schools constituted
charitable contributions and cited an IRS break given to Church of Scientology members

January 30, 2002

By HENRY WEINSTEIN, Times Legal Affairs Writer

A federal appeals court Tuesday unanimously denied the claim of a North Hollywood couple
that they were entitled to a partial tax refund for tuition payments they made to two
Orthodox Jewish day schools.

The couple had contended that 55% of the tuition payments--the portion of the school
day devoted to religious education--represented charitable contributions to a tax-exempt
religious organization.

Michael and Marla Sklar also maintained that they were entitled to the refund because
the Internal Revenue Service since 1993 has permitted members of the Church of Scientology
to obtain deductions for "auditing," the process Scientology adherents use for
spiritual self-examination.

In essence, three judges of the U.S. 9th Circuit Court of Appeals ruled that two wrongs
don't make a right, upholding a ruling of a U.S. Tax Court judge denying the refund.

The judges said the Sklars were not entitled to a refund under either IRS regulations
or applicable Supreme Court precedents.

The leading precedent, the judges said, is a 1989 high court decision holding that
payments Scientologists made for "auditing" did not constitute charitable
contributions.

That decision, Hernandez vs. Commissioner, was based on a section of the Internal
Revenue Code that states that quid pro quo donations, for which a taxpayer receives
something in return--such as education--are not deductible. The Hernandez decision held
that the section applies to religious quid pro donations.

In Tuesday's decision, the appellate court criticized the IRS for refusing to disclose
the terms of a 1993 settlement with the Church of Scientology. That agreement, among other
things, permits Scientologists to get deductions in conflict with the 1989 Supreme Court
decision, according to the 9th Circuit.

In support of their claim, the Sklars presented a 1997 Wall Street Journal article that
provided details of the settlement. The 9th Circuit said that since the IRS failed to
present any contradictory evidence on the nature of the settlement, the court was obliged
to accept the Sklar's representations.

The settlement ended years of litigation that began in 1967 when the agency said the
church should lose its tax-exempt status because it was, in reality, a for-profit
enterprise that enriched its officials.

Although it was not directly at issue in the case, the 9th Circuit panel said that
"it appears to be true that the IRS" had given Scientology a "preference in
the interest of settling a long and litigious tax dispute."

In his majority opinion, Judge Stephen Reinhardt suggested that the preference
represented unconstitutional favoritism toward a religious organization. Judges Harry
Pregerson and Barry G. Silverman joined in the ruling.

In a separate concurring opinion, Silverman made an allusion to the Passover Holiday
when he asked:

"Why is Scientology training different from all other religious training? We
should decline the invitation to answer that question. The sole issue before us is whether
the Sklars' claimed deduction is valid, not whether members of the Church of Scientology
have become the IRS's chosen people."

In a highly unusual move, Silverman invited people who are troubled by the IRS
settlement with Scientology to file a lawsuit to unravel the deal.

"If the IRS does, in fact, give preferential treatment to members of the Church of
Scientology--allowing them a special right to claim deductions that are contrary to law
and disallowed to everybody else--then the proper course of action is a lawsuit to put a
stop to that policy.

"The remedy is not to require the IRS to let others claim the improper deduction,
too," Silverman wrote.

Jesse Choper, a constitutional law professor at UC Berkeley's Boalt Hall School of Law,
said Tuesday's ruling appeared to be correct, based on the Internal Revenue Code and the
prior cases interpreting it.

Choper also said that he believed taxpayers would have standing to bring a suit
challenging the IRS settlement with Scientology under a 1968 Supreme Court decision, Flast
vs. Cohen.

In that case, the high court upheld a taxpayer's standing to challenge federal
subsidies to parochial schools as violating the 1st Amendment's prohibition against
government establishment of religion.

Michael Sklar said he was disappointed that the decision "didn't address the
serious inequities on the part of the government--basically subsidizing one religion to
the exclusion of all others."

He added: "The problem with Judge Silverman's remedy is there is no way to undo
the past. Scientology already has gotten the benefit."

Sklar's attorney Jeffrey I. Zuckerman said he was considering asking for a rehearing
before a larger panel of 9th Circuit judges or asking the U.S. Supreme Court to review the
decision.

PDF file of opinion at 9
Circuit Court of Appeals website "An IRS Closing agreement cannot
overule Congress and the Supreme Court"...." If the IRS does in
fact give preferential treatment to members of ...Scientology-- allowing them a special
right to claim deductions that are contrary to law and rightly disallowed to everybody
else -- then the proper course of action is a lawsuit to put a stop to that policy
---"